China direct sourcing: 7 common mistakes (you may be making right now)

China direct sourcing strategy is potentially one of the most powerful strategies for organizations that must offer competitive prices to their market, open fast and efficient communication channels with the makers of their products, protect their IP and other assets and more.
It gives you the flexibility of using business services in China without creating a long and inefficient supply chain in case you need to add skills and knowledge your organization doesn’t have inhouse.
I used the word “potentially” because many companies make mistakes.
They make mistakes that not only prevent them from achieving the goals they could have achieved if implementing the China direct sourcing strategy correctly; they get the exact opposite results. They increase their costs, lose control over the quality of their product and worse of all degrade their brand and reputation. This usually happens although business services in China, that can help mitigate these risks are available.
True, China direct sourcing is not for everybody. If your product is still in development stages, or if your finances are not strong enough, China direct sourcing is probably not for you. Also, if you, or someone you hire, don’t have the technical skills to tell a good quality product from a bad one, you need to choose another strategy.
That being said, you can always hire business services in China to build a stronger strengths and skills portfolio to your organization quickly and, if done wisely and relatively low cost. So before you give up, check what business services in China are available.
However, If you say yes to all the following, then China direct sourcing is for you and I warmly recommend you read this post to its end. You won’t be sorry.
  • Your product has a complete manufacturing file, a factory can look at, and produce your product according to.
  • When you see your product, you will know if the quality is good or not.
  • You have enough funds to invest in establishing a direct communication channel with a viable supplier, that will give you both real time updates from the manufacturing floor, and the ability to respond quickly to this information by discussing it with the factory directly and give them your instructions.
So, if China direct sourcing is for you but you are not getting the kind of results you expect, maybe you are making some of the mistakes so many other people are making without even realizing it.

China direct sourcing

Here 7 common mistakes, you need to make sure you are not making.

Mistake #1: Working with the wrong factories.

People work with the wrong factories for many reasons. Some of the most common are
  1. They don’t have a structured and efficient sourcing process. Therefore their initial candidate list is small and they have very little options to choose from. So they work with the best option even if it does not meet the basic requirements. If you don’t have a good process, this  link will help: A simple yet efficient sourcing process
  2. They don’t audit their candidate factories. Traits and capabilities that make a factory suitable for one company, make it the exact opposite for another company. For some people receiving, a good recommendation from friends is enough to make the decision to enter business relationship with a new supplier.
    Different companies prioritize differently. Some require low volume high mix, some require speed, some require accurate documentation of every step in the process and some prioritize…price.
    There are many reasons why a factory can be good for one company but not good for another, and this is why it is not enough, when a factory comes with good references. You should perform your own audit. Auditing a factory in China takes time, a certain set of skills and sometimes money.
    Here too, if you are not working according to a process, your time investment will be very high with little return. More details about the challenges and a good auditing process you can find here: Factory auditing process
  3. Sometimes, even if the factory is capable, supplies high quality product and provides good service, it could still be the wrong factory for you.
    The reason is that there are other things that can make a “good” factory “wrong” for you. It could be because the factory is too small, and they can not handle your orders size.
    It could be because the factory is already working with your direct competition and working with that factory will result in transferring to your competition your IP.
    It could also be that the factory is full of orders and as much as they want, they don’t have the resources to handle more orders.

Mistake #2: Start the quality control process after production is finished.

Quality control costs money and we all wish we could avoid that part of order management. Buy poor quality and late deliveries cost even more. They cost money and damage your reputation. And it doesn’t end there. Negotiating the next order after a failed delivery is nothing like negating the next order after a successful one.
Most companies understand that and arrange for a pre-shipment inspection thinking that will do the job. But a pre-shipment inspection only can only prevent poor quality shipment. It can not prevent late deliveries due to poor quality.
Poor quality is not always the result of lack of attention from the factory, lack of technical skills, production management knowledge, etc.
Many times it is communication problems that cause it. Misunderstandings.
Especially when you are working with a new supplier, miscommunication is natural part of the learning curve.
Just like the previous two reasons, managing quality is better done by a process that works towards mitigating as many risks as possible, not only shipment of poor quality goods.
Pre shipment inspection involves certain cost because a team, inhouse or outsourced has to go to the production site and inspect the goods over there.
However, other quality management actions can be done in remote control and can help a lot in increasing the chances for an on time, high quality delivery.
Here is a link that will give you some good tips you can follow: Production order quality management process

Mistake #3: Not having a trustworthy person or team in China.

Things don’t always work the way you planned. Sometimes events take turns that require your involvement and action.
There is a built-in conflict of interest in every buyer – supplier relationship. Professional and ethical companies know how to manage this conflict, but sometimes, even within the grey areas and with goods intentions only, factories make decisions that work against you.

To prevent this from happening you need two things:
  • A reliable source of information that will report to you about important events clearly and in real time.
  • A reliable communication channel that will transfer to the factory your instructions and verify they are followed.
Getting the right piece of information at the right time can be the difference between a successful and a failed shipment.
Having a full-time team in China can get expensive…very expensive.
But that does not mean you cannot have someone in China you trust, you can ask to perform for you a one-time task.
Finding someone trustworthy is not easy. Trust is something that is being built.
A person can earn your trust only if they are ethical, professional, service oriented, have the right kind and amount of experience that is relevant to your industry and more.
Therefore, if you don’t have someone you trust in China, don’t wait for a crisis to happen before you start looking for one. Look for potential candidates, get to know them, and at time of need, choose the right one to help you solve any arising issues.
Again, this costs money, as you need someone, inhouse or outsourced to go to the factory, verify with their own eyes that your instructions are followed and sometimes even help you analyze with locals eyes and mindset what is really going on.
Still, more often than not, what ever amount this will cost you, it will not be more expensive than the damage late / poor quality shipment will cause.
Here is an idea for one kind of China business service that could help your team in China

Mistake #4: Not using inspection timing and payment terms to minimize risk.

As I just said, things may not always work smoothly during a production order and you need to know when such turns of events take place.
For this you need to identify control points during which someone from your organization will go to the factory and confirm the mile stones were reached successfully, because if they weren’t, chances are that either the shipment will be delayed, or quality will be poor…or both.
It is not always easy to do that. One of the reasons it that these inspections cause the factories delays and stop the smooth process of production. This is why sometimes you will not get the full cooperation of the factories.
To increase your control over the production process you want to agree with the factory on interim inspections in critical points during the production that will allow you to know and take action (if needed) what is the true status of the production. Otherwise, the day of the pre-shipment inspection day, may be full of surprises.
Since the GFC in 2008, Chinese factories are much more suspicious and careful when negotiating payment terms with new customers.
Still, you have a lot of room to negotiate.
Combine the timing of your inspections and payment to give you maximum control and allow you to pay after you reach the highest level of confidence regarding the progress of the production and the quality of the goods.

Mistake #5: Ignore the cultural dimension.

Culture differences and language barriers are a huge contributing factor to miscommunication.
It is impossible to teach anyone everything about another culture to the point where miscommunication doesn’t happen because of culture difference.
However, if you keep on reminding yourself, all the time, that culture gap exists, you will be more careful, and take further measures to ensure messages you send were understood, and you understand the messages that are sent to you.
Sometimes both you and your Chinese manufacturing partners have a common goal to understand each other and agree. This happens for example when you are discussing the quality of a product or the production process. You want to get the product on time, and the supplier doesn’t want any unpleasant surprises when you come to inspect your goods.
However, sometimes, you and your supplier are trying to be blur and vague on purpose, so to allow some flexibility in the future; during negotiation for example.
It is very difficult, and there is no secret formula to do this, but you need to be sensitive and alert to nuances in this kind of circumstances. Both you and your Chinese counterpart are acting within what you both consider as the “rules of the game” and you both think you are being ethical. But the rules of the game are different between cultures so being alert and trying to confirm and reconfirm the obvious is never a bad idea.

Mistake #6: Misunderstanding the purpose of signing a contract.

If you organization is the size of Apple and your manufacturing partner is someone like Foxconn, then the following text is not for you. If you are slightly smaller than Apple and so is your manufacturing partner, keep on reading.
Enforcing a contract through the legal system in for you as a non-Chinese company is going to be difficult an quite to very expensive. Chinese courts are known to be very supportive of local companies and by the time the legal system will finish dealing with your case, you will lose what ever it is that you were trying to win.
This does not mean that signing contracts is useless. For many companies the purpose of a contact is primarily to have a document both parties sign that makes it clear what are the terms and conditions of the business deal.
If the relationship between you and your factory were not severely damaged, and
both parties still have respect for each other, AND
there is a wish to continue working together,
at times of disagreements, it is good to pull out the contract you signed and speak to the maker face to face without the involvement of lawyers.
Many times (not always though), if after reading the contact the maker will realize they were wrong, they will try to fix the damage and also compensate you if they should.
The compensation may not be what you were hoping, but usually you will get more and get it faster than if you were going through the court.
Their motivation is primarily future business with you.
Sense of justice is a very strong motivator. That being said, justice is given to interpretation, especially between cultures.
Bottom line: Always sign a contract.
Remember that you control your risk by making your supplier want to protect their future business with you,
Never expose yourself to bigger risks than absolutely necessary, and
make sure you have enough leverage over your supplier in case harsh negotiation is necessary.

Mistake #7: Think that everything in China is cheap

This may seem a bit strange, but from time to time I meet people that didn’t notice the progress that China has made since the end of the last millennium.
They don’t connect the gap between the dots of high GDP, high demand / low supply for skilled people and some materials and products.
These people are often surprised, disappointed and annoyed when they find that their severely under estimated some of the costs and that this under estimate turn their numbers from black to red.
I see this happen a lot when some people are talking to me about opening their own offices in China.
Salaries all over China are rising consistently and that has impact on the price of raw materials, products and services.
This doesn’t mean you can not have your own team in China. But a more creative and careful plan is needed.
On the other hand, unlike the end of the last millennium, China can offer a work force with higher skills and higher quality products and services that definitely allows you to do more with less people.

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